The Basics of Franchise Law

August 24, 2017

Have you been presented with franchise opportunities? Congratulations! If you’re currently scouting brands, you likely understand that when you own a franchise, you’re potentially putting yourself on a path to success and financial freedom. However, it’s not as simple as finding a franchise for sale and buying it. Before signing your name on the dotted line, you’re going to want to do some research on the legalities of procuring a franchise business. In order to help you navigate the legal ins and outs of franchise law, we’ve decided to share some of the basics.

When Is a Business Considered a Franchise?

According to federal law, franchise opportunities and arrangements must include specific elements. There are basically three main characteristics. Even when an agreement is called something other than “franchise”, if the below factors are present, it is legally considered a franchise:

The franchisee pays fees to the franchisor. This can be in the form of a franchise fee, royalties, or other payments, and it must be for the right to run the business.

The franchisor must have significant control over operations. This might include aspects of the business such as marketing, training, and drafting operations manuals.

While the franchisee may own a franchise, the services and products provided by the business are associated with the franchisor’s trademark.

How Is Franchising Regulated?

Before moving forward with franchise opportunities, it’s important to understand how state and federal governments regulate the purchases. This can be organized into three general categories:

Federal Disclosure Laws

The FTC’s Disclosure Laws dictate the kinds of information the franchisor must disclose prior to the completion of a sale. Disclosure Laws also include forbidden sales practices as well as the mandatory time period given to franchisees to reconsider a purchase and get their money back (a.k.a. the cooling-off period). For example, if a refund becomes due, the franchisor has two weeks to return funds.

State Registration Laws

Not every state has enacted registration laws. For those that have, the laws generally cover issues such as annual reviews of registration applications and the requirements for filing annual notices.

State Relationship Laws

Like Registration laws, not all states have enacted relationship laws regulating franchise opportunities. The rules that have been made into law address the relationship between franchisors and existing franchisees. This might include issues like prohibiting discrimination, regulating specific industry sects, and dictating where litigation can be carried out.

What Are Franchise Disclosure Documents?

FDDs are the documents provided to prospective buyers during the pre-sale period. There are actually 23 different items that must be included in the FDD. The FDD must be given to a potential buyer at least 14 days prior to a contract being signed or funds being released. Franchisors who fail to disclose the required information risk receiving penalties and fines imposed by state and federal entities. There are many resources for getting help with FDD issues including franchise law attorneys and the FTC website.

At Best in Class Education Center, we aim to provide affordable franchise opportunities in the supplemental education sphere. We’ve been in the franchise industry for over two decades and have created a system that makes the purchasing process as easy and smooth as possible. Once franchisees are ready to move forward with their businesses, they enjoy an honest, supportive, and ongoing relationship with the corporate team. All Best in Class franchisees are provided with the resources and guidance that set them up for success.

Do we have a franchise for sale? Yes! Best in Class is currently looking for motivated candidates who have a passion for education and their communities. As one of the top franchises, our goal is to spread a philosophy of building better teachers to build successful students. If you’re in the market for franchise opportunities that are making a real difference in the world, you should own a franchise with Best in Class. Get in touch with us today!

(This information was only intended to educate and should not be interpreted as legal advice.)